Now I get it why Crocodile skin handbags deserve their price tag. Come on!

When you run a business magazine it is expected you would do more than surface scratching on business topics. But that is too much to expect these days. At the very least such business magazines should refrain from stories that are seemingly well-researched but completely miss the point. Recent example is the article in Bloomberg’s Business of Fashion section.

It tells us, complete with quotes from crocodile farmers and analysts, why those handbags sell for 30 times the price of those made of cow hides.

… no crocodile is easy or cheap to raise, and it takes years to breed them.

“If I’d known how hard this business was before I’d got into it, I may not be here today,

And so on and so forth about the high cost of raising crocodile and harvesting their skins.

The article while touches upon on market size and demand side completely fails to grasp the concept of customer segmentation and why these customers buy a crocodile skin handbag. Whoever these customers are, it is safe to say they are not buying these bags for simply carrying their stuff. This is not a utilitarian buy.This is a conspicuous consumption to help them flaunt their exclusivity.

And for that they are willing to pay a high price tag for that purpose. These customers could care less about how difficult it is to raise crocodiles or how deadly their bites are. If the handbag cannot deliver such exclusivity they will hire another product.

On the flip side, if raising crocodiles becomes so simple and the market is flooded with their skins, these segments will find the crocodile skin handbags fail to the job they hire them for and will move on to better candidates.

If luxury marketers understand this job to be done and customer willingness to pay they are willing to make investments and take risks to build the product. They will do so as long as the return on risk far outweighs the cost of a few bites. Shed no crocodile tears for those complain how hard it is to produce the product, they are either using it to justify high prices or shouldn’t be in the business in the first place.

When you look at the simplified value chain here is how it looks like:

Customers ← Marketers ← Middlemen ← Farmers

Ultimately the customer decides what price are they willing to pay for a product they are hiring for a certain job. Marketer has influence over this price. But it is still the customer who forks over the money. If there are no customers there won’t be marketers either.

Marketer’s role is to understand customer needs (job to be done) and deliver them a product that does the job far better than the alternatives. They get paid for that job. They make profit by finding ways to do it far cheaper than the price customers are willing to pay.

Middlemen are the suppliers, distributors, resellers etc. Once again they are in this crocodile skin value chain only because they believe they can make a profit.

Same goes for farmers. Since the costs are high and the risks are high not many will rear crocodiles. But those who do that do so because they found a way to make a profit.

That is the value chain with customer at the top. And they do not care about the travails of those at the other end of the chain nor are they willing to pay higher prices to offset someone else’s costs.